Taxing Health Care

Obama and Democrats owe John McCain an apology.

Updated May 29, 2009 12:01 a.m. ET

Politicians wouldn't be politicians if they didn't trim their sails to the prevailing winds. Even so, the emerging 180-degree turn by Democrats on taxes and health insurance is one for the record books.

ENLARGE

AP

Democrats have spent years arguing that proposals to equalize the tax treatment of health insurance are an outrage against the American people. Workers pay no income or payroll taxes on the value of job-based plans, but the same hand isn't extended to individuals who must buy coverage on their own. Last year liberals mauled John McCain for daring to touch the employer-based exclusion to finance more coverage for the individually uninsured. He was proposing "a multitrillion-dollar tax hike -- the largest middle-class tax hike in history," said Barack Obama, whose TV ads were brutal.

But now Democrats need the money to finance $1.2 trillion or more for their new health insurance entitlement. Last week Senate Finance Chairman Max Baucus released his revenue "policy options" and high on the list is . . . taxing health benefits. Or listen to White House budget director Peter Orszag, who recently told CNN's John King that the exclusion "was not in the President's campaign plan, it wasn't in our budget. Clearly, some Members of Congress are putting it on the table and we are going to have to let this play out."

Mr. King tried again. "Let this play out. But would the President sign a bill that includes a pretty significant tax increase? That would be a tax increase." Mr. Orszag: "We're not going to be -- I think it's premature to be commenting on individual items . . . There are lots of ideas that are being put on the table." Translation: You betcha he'd sign it.

The tax exclusion is such a big revenue prize because Mr. Baucus is scrubbing every other tax nook and cranny and only coming up with rounding errors. A sampler:

- Impose an excise tax on hard alcohol, beer and some kinds of wine. That would be in addition to a sin tax on beverages sweetened with sugar or high-fructose corn syrup, such as soda. Mr. Baucus doesn't offer revenue estimates, though the Congressional Budget Office says a $16 per proof gallon alcohol tax might raise $60 billion over 10 years, and another $50.4 billion at three cents per 12 ounces of sugary drink.

- End or limit the tax-exempt status of charitable hospitals, which only costs currently a mere $6 billion a year.

- Make college students in work-study programs subject to the payroll tax. Also targeted are medical residents, perhaps on the principle that they'll one day be "rich" doctors. CBO has no score on these.

- For individuals with high-deductible insurance plans, contributions to health savings accounts would no longer be tax deductible. That would penalize patients who choose plans that encourage them to be informed consumers. CBO says that banning HSA payments entirely would yield all of $10 billion.

By contrast, the employer-based exclusion offers a huge money pot -- an estimated $226 billion in 2008. Yet as liberal MIT economist Jonathan Gruber recently told Mr. Baucus's committee, "no health expert today would ever set up a health system with such an enormous tax subsidy to a particular form of insurance" (his emphasis). It creates a coverage gap between workers who receive it from their employers and those who pay -- or can't afford to pay -- with after-tax money.

The tax exclusion is also one reason health costs continue to rise. It encourages workers to take an extra dollar of compensation in fringe benefits instead of cash while also routing low-deductible health spending through third parties. Some 84 cents of every medical dollar is spent by someone other than the patient. The insured have no incentives to make cost-conscious decisions about care.

So reforming the exclusion would inject a dose of discipline into American medicine. But for most Democrats the goal isn't to create a more rational health-insurance market. They simply want the revenue for another government program. Mr. Baucus won't target gold-plated employer insurance plans in general, because union-negotiated benefits are usually gold-plated. Rather, he may cap or phase out the exclusion by income, starting with workers earning more than $200,000. Insurance options that don't conform to government diktats (health savings accounts) would also lose any tax advantage. This would do nothing for market efficiency, but it would be one more stealth tax increase.

Democrats owe an apology to Mr. McCain, and it'll be fascinating to see if they will now suffer a political backlash of their own making. Having told the country that this tax reform is really a tax increase, Democrats are opening themselves to the same attacks they leveled against Republicans.

They could avoid that fate if they used the tax exclusion money to finance, say, a tax credit for the uninsured. That would be a genuinely bipartisan reform. But liberals won't accept that because they want to take one giant step toward government-run health care. And the only way they can pay for it is by taxing everything in sight, including your current health insurance.

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